The most dangerous idea, they say, is excessive pessimism about monetary
policy. If you look back at the two key eras where we say monetary policy
went awry—during the deflation of the 1930s and the inflation of the
1970s—the interesting thing that Romer and Romer find is that if you dig
into the archives of the Federal Reserve minutes there weren't really
"mistakes" as you might think of it. Policymakers in the '30s knew there was
a deflationary slump, and they knew it was bad, just as policymakers in the
'70s knew there was an inflationary spiral, and they knew it was bad. But in
the '30s, policymakers persuaded themselves that with interest rates already
low there was nothing more they could do, while policymakers in the '70s
persuaded themselves that inflation represented a purely structural
phenomenon that they couldn't cure. So you got a lot of talk about how other
people need to step up.

The funny thing, they say, is that in both cases it turned out the problems
could actually be solved quite quickly once you put someone in office who
thought it was possible to solve them. The Volcker recession, in particular,
though painful, was actually remarkably short and achieved its objective
decisively. There's every reason to think you could have done the same thing
in 1971 or 1978, and it probably would have been even quicker and less
painful. ...

If I have any disagreement with the Romers, it's that they emphasize a
disagreement about efficacy (as David Romer put it, "fear of impotence is
bad for performance"), but I would emphasize an issue of accountability.
Economists tend to worry a lot about incentives except when it comes to the
behavior of economists. But the operational independence of the Federal
Reserve means its personnel have a strong incentive in any troubled time to
engage in a lot of blame-shifting and ducking of responsibility. But in the
'30s and '70s and today, you're essentially facing problems of expectations
management, and a central banker can't steer expectations effectively unless
he's willing to put his reputation on the line.

The most dangerous idea, they say, is excessive pessimism about monetary
policy. If you look back at the two key eras where we say monetary policy
went awry—during the deflation of the 1930s and the inflation of the
1970s—the interesting thing that Romer and Romer find is that if you dig
into the archives of the Federal Reserve minutes there weren't really
"mistakes" as you might think of it. Policymakers in the '30s knew there was
a deflationary slump, and they knew it was bad, just as policymakers in the
'70s knew there was an inflationary spiral, and they knew it was bad. But in
the '30s, policymakers persuaded themselves that with interest rates already
low there was nothing more they could do, while policymakers in the '70s
persuaded themselves that inflation represented a purely structural
phenomenon that they couldn't cure. So you got a lot of talk about how other
people need to step up.

The funny thing, they say, is that in both cases it turned out the problems
could actually be solved quite quickly once you put someone in office who
thought it was possible to solve them. The Volcker recession, in particular,
though painful, was actually remarkably short and achieved its objective
decisively. There's every reason to think you could have done the same thing
in 1971 or 1978, and it probably would have been even quicker and less
painful. ...

If I have any disagreement with the Romers, it's that they emphasize a
disagreement about efficacy (as David Romer put it, "fear of impotence is
bad for performance"), but I would emphasize an issue of accountability.
Economists tend to worry a lot about incentives except when it comes to the
behavior of economists. But the operational independence of the Federal
Reserve means its personnel have a strong incentive in any troubled time to
engage in a lot of blame-shifting and ducking of responsibility. But in the
'30s and '70s and today, you're essentially facing problems of expectations
management, and a central banker can't steer expectations effectively unless
he's willing to put his reputation on the line.